Buffett's Graham Swap Is Latest Deal to Limit IRS's Take

Warren Buffett, who has criticized businesses for complaining about tax rates, showed last week how adept he is at lowering his company’s payments to the U.S.

Berkshire Hathaway Inc. plans to limit taxes on more than $1 billion of gains in Graham Holdings Co. stock by swapping the shares for assets owned by the former Washington Post publisher, according to a March 12 regulatory filing outlining terms. Either side can cancel the agreement if lawyers determine it doesn’t qualify for the intended tax treatment.

The deal highlights how Buffett works to reduce obligations to the government at Omaha, Nebraska-based Berkshire. The billionaire chairman and chief executive officer used Internal Revenue Service rules to benefit his shareholders in transactions including a swap with White Mountains Insurance Group Ltd. and the sale of ConocoPhillips stock.

“He has been a student of the tax code really all his adult life,” said Jeff Matthews, a Berkshire shareholder and author of books on the company. “His knowledge is encyclopedic, and he’s always used it to his financial advantage.”

Buffett has cited Berkshire’s tax bill as a point of pride. The billionaire wrote a decade ago that he hopes “the rest of Corporate America antes up along with us” and he continued his critique as his company’s contribution climbed. Its effective tax rate was 31 percent last year, according to data in the most recent annual filing.

‘Complaining Enormously’

“American business is complaining enormously about the level of the corporate income tax,” Buffett said at Berkshire’s annual meeting in Omaha last year. “I would have you take that with a grain of salt.”

In the Graham deal, known as a cash-rich split-off, Berkshire agreed to hand over about $1.09 billion in shares of Graham, which rose more than 100-fold since Buffett bought the stake in the 1970s. Graham will give up a Miami television station, stock it holds in Buffett’s company and about $328 million in cash.

Berkshire owns 1.7 million shares in Graham’s publicly traded Class B stock, more than triple the stake of any other investor. Selling the holding on the open market would trigger capital gains taxes at a 35 percent rate.

Assets Package

Instead, Graham is putting together a package of assets in a new subsidiary that it could trade for its own shares. By including WPLG, the TV station valued at $364 million, the companies plan to meet a requirement that at least one-third of the value be contained in an active business.

Graham also will give Buffett’s company about $400 million in Berkshire stock. Either company may terminate the deal if it doesn’t qualify for “non-recognition of gain and loss,” the filing shows. Buffett, 83, didn’t return a message left with an assistant seeking comment.

Graham is focusing on businesses including its Kaplan education unit and a cable provider after selling the Washington Post last year to Amazon.com Inc. CEO Jeff Bezos. Rima Calderon, a spokeswoman for Washington-based Graham, declined to comment.

The asset swap will scale back an investment that Buffett had pledged would be a permanent holding. It will also recast his relationship with a business to which he has had deep personal ties. He served on the company’s board twice and was a confidant of longtime CEO Katharine Graham, who died in 2001. Don Graham, Katharine’s son and the company’s current CEO, is one of Buffett’s friends.

‘Tax-Efficient Manner’

“It allows Berkshire to reduce its holdings in Graham in a tax-efficient manner, and it also allows Graham Holdings to reduce its position in Berkshire Hathaway in an equally tax- efficient manner,” said Joshua Brady, a partner at Bingham McCutchen LLP in Washington who advises companies on split-off transactions. He wasn’t involved in the Berkshire deal.

Last year, Berkshire and Phillips 66 announced a similar transaction in which Buffett’s firm received a pipeline flow-improver business and cash in exchange for more than $1.3 billion of stock in the energy company. The shares had climbed since Phillips 66 was spun off from ConocoPhillips in 2012.

That followed a deal in 2008 in which Berkshire swapped stock it held in White Mountains in return for insurance businesses and more than $700 million in cash. The agreement was structured to avoid a taxable gain for both companies, according to a statement at the time.

One-Third Standard

In 2006, the U.S. Congress loosened rules that define active businesses, and lawmakers also set the one-third standard. Those changes followed complaints from businesses, and concerns that companies such as Janus Capital Group Inc. were structuring deals that were effectively disguised sales.

The revision was estimated to raise $65 million for the government over a decade.

Split-offs are a mainstay of corporate tax practice, and allowing companies to break apart makes sense as policy, said Lawrence Zelenak, a tax law professor at Duke University in Durham, North Carolina. Liberty Media Corp. used this structure in a 2007 deal to acquire the Atlanta Braves baseball team.

“It’s more the avoidance of a bad result than getting a wonderful result,” he said. “I don’t think he’s ever suggested that he’s not going to take advantage of things that work under current law because he thinks they’re bad policy.”

Second Richest

Buffett, the second-richest person in the U.S. with a net worth of $63.1 billion, has been vocal about tax policy and lent his name to a proposal by President Barack Obama to require a minimum rate on the highest earners. In 2011, Buffett wrote in the New York Times that he paid 17.4 percent of his taxable income to the U.S., the lowest rate in his office.

A year later he said in the newspaper that it was “sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.”

Buffett’s personal tax bill reflects U.S. policies that provide preferential rates on investment income compared with wages, and his choice to take a $100,000 base salary from Berkshire, a fraction of the compensation received by CEOs of similar-sized companies. He has pledged to donate most of his wealth, which is in Berkshire stock, to charity.

Berkshire climbed 0.3 percent to $185,461 at 10:05 a.m. in New York, extending its gain to about 21 percent in the past year. Graham Holdings has advanced 63 percent in that period.

Full Ownership

Buffett has said taxes are one reason he prefers full ownership of companies, rather than investing in equities. Stockholders have to pay taxes on dividends disbursed by businesses that have already sent a portion of their profits to the government.

In 2009, Berkshire emphasized tax advantages it received when it sold ConocoPhillips shares for less than what Buffett paid, even as he expected the stock to rebound. The losses would help recover about $690 million in capital gains taxes that Buffett’s company paid in 2006, according to a statement discussing the sales.

Robert Willens, an independent tax consultant, said the Graham deal is consistent with Buffett’s other efforts.

“He does do things that are tax efficient for the corporation,” Willens said. “No question.”

While companies typically seek to limit their tax burden on deals, Berkshire stands out because of Buffett’s public posture on paying one’s fair share of taxes, Matthews said.

“If it were anybody but Warren Buffett, there’d be no story,” Matthews said. “But this is a guy who takes companies to task for going to great lengths to minimize their tax burdens, and he’s been doing it all his career.”